What was behind BHP’s second bid for Anglo American?
BHP boss Mike Henry has raised eyebrows with his latest aborted tilt for Anglo American but analysts say his biggest mistake was not getting hold of his rival the first time.
When Mike Henry was asked recently what he hoped to achieve before stepping down from BHP, his answer focused on the “portfolio of growth options that now sits ahead of us”.
“A lot of the fun stuff is yet to come by way of getting that growth really unlocked,” he told analysts in August, amid speculation that the world’s biggest miner was close to appointing his successor.
However, Henry’s attempts to convince investors that he has established a compelling organic growth story for BHP have been undermined by the disclosures at the weekend that he had, in recent days, once again tried and failed to buy Anglo American.
“Having been very softly telling the market they weren’t really going to go back for Anglo, and now they have, I suspect it shows that they clearly want the copper and they feel that to buy it is easier and maybe cheaper than to build it,” Richard Hatch, an analyst at Berenberg, said.
BHP made its first approach in April last year, with a complicated proposal that was conditional on Anglo first demerging its South African iron ore and platinum businesses.
It walked away from the $US39bn bid after being repeatedly rebuffed over five weeks.
Since then Anglo has been on the front foot and hatched its own plan: a $US50bn merger with Canada’s Teck Resources.
“We would have been surprised if BHP, Rio [Tinto], Glencore, Freeport [McMoran] and others had not been at least considering whether there was an opportunity to gatecrash the Anglo-Teck deal (with a focus on Anglo more than Teck due to Anglo’s world-class assets),” Christopher LaFemina at Jefferies said.
A vote by Teck shareholders is due on December 9. In that sense, the timing of BHP’s approach is not a surprise. “If it was going to happen, it was going to have happened in the next week or it’s too late,” one top-30 shareholder in BHP, Anglo and Teck said.
However, the speed with which this latest approach was tabled, and then canned, left shareholders scratching their heads.
The approach is thought to have come from BHP’s chairman Ross McEwan to Anglo chairman Stuart Chambers last week. Bloomberg reported it on Sunday and with Anglo said to have rebuffed the approach, BHP put out a statement on Sunday night - before markets opened in Australia where it is listed - confirming it was “no longer considering a combination of the two companies”.
“That BHP put out the announcement saying that they won’t take any further action slightly surprised us,” the top-30 shareholder said. George Cheveley, portfolio manager at Ninety One, a shareholder in Anglo, agreed: “I can’t really explain why you come in, make one bid, they say ‘no’, and you go, ‘OK, walk away’,” he said. “It seems odd.”
BHP said in its statement that it continued “to believe that a combination with Anglo American would have had strong strategic merits and created significant value for all stakeholders”.
Taking over Anglo would have given the combined company “the world’s best copper business”, LaFemina of Jefferies said, whereas “the standalone BHP investment case is more challenging”.
He added: “BHP would arguably benefit most from doing a deal in copper as its own copper production in Chile is declining, its capex is rising - in part due to capital-intensive, longer-term copper projects and its relative exposure to iron ore and met coal is rising due to higher volumes in those segments and lower volumes in copper.”
The top-30 shareholder said: “If you’re a company that has lots of iron ore, and would rather have a lot more copper, you’re faced with a question of: do I buy that exposure, or do I build it? It’s hard, complex, expensive, lengthy, risky to build. Relatively speaking, M&A is lower risk and I think it is still cheaper to buy.”
However, while BHP’s repeated failure to get the Anglo deal through may have been “frustrating”, the shareholder said it could also be seen as evidence that they were “very structured and disciplined and make sure that they don’t overpay for things”. Indeed, for analysts at RBC Capital Markets, the possibility of BHP trying to gatecrash the deal had been an overhang on its shares: walking away, they argued, “reduces risk of value leakage, execution drag, and multi-year integration uncertainty that the market had been discounting”.
BHP insisted that it remained “confident in the highly compelling potential of its own organic growth strategy”. But Cheveley of Ninety One believes shortcomings in its portfolio are clear. “They have organic growth options, the problem is they’re going to cost a lot of money, and you’re not going to see any growth for over five years,” he said.
“If we fast forward to 2035, BHP has a very good copper business - but that’s ten years’ time. Their issue is over the next five years, they’re flat-to-down on copper production, so you’ve got this rather uninspiring growth profile.”
BHP had previously flagged the high capital expenditure involved in developing new copper mines and indicated that copper prices would have to rise to meet global demand, he said. “That sounds like an argument to buy rather than build” - especially since BHP has “operated very well the last two years”, keeping its costs low.
“If you can operate better than most people, and capex numbers are going up, surely then buying something makes sense? But then when it comes to buying they don’t seem keen enough to pay what’s required.”
For Cheveley, this will be the one blot on the otherwise impressive record of Henry at BHP. “The one big mistake under his tenure was not getting hold of Anglo the first time.”
With BHP seemingly out of the picture for now, analysts appear more confident of the Anglo-Teck deal going through. The reminder that Anglo has other options may not have been unhelpful; Cheveley speculated that one theory about events is that “maybe Anglo leaked it to frighten Teck shareholders into voting for the deal, because if BHP came for Anglo, people are worried what would happen to the Teck share price. They get left alone”.
The deal still also requires approval from the Canadian government, which has been agitating for more from Anglo despite it already committing that the merged company’s headquarters would be in Canada. Hatch of Berenberg suggested “recent headlines that Canadian politicians could potentially frustrate the proposed Anglo/Teck Resources merger because they want more benefits for Canada may well have stirred BHP into action”.
Other interlopers have also been rumoured: Palliser Capital, an activist in Rio Tinto, has been urging it to make a bid for Teck. But Hatch is sceptical. “The logical owner of Teck is Anglo,” he said. This is mainly because of promised synergies in combining Anglo’s Collahuasi mine in Chile, co-owned by Glencore, with Teck’s neighbouring Quebrada Blanca mine. “Glencore has got the wrong cultural fit, so I don’t see it myself.”
The top-30 shareholder said: “It’s a really high bar to get over because the combination between Anglo and Teck is so attractive. None of these things are risk free, but it’s an extremely compelling proposition. I’m not losing sleep over the deal’s failure to complete.”
The Times
